Colombo March 22 2023: Sri Lanka’s president has called on China and its other creditors to quickly reach a compromise on its debt restructuring or risk creating more economic peril.
In his first interview since the IMF approved a $3bn, four-year lending programme on Monday, Ranil Wickremesinghe said the deal and his long-term reform plans were the country’s “last chance” to open up an economy beset by shortages of food, fuel, medicine and foreign currency during 2022.
“I would like to see the agreements by the end of the year,” Sri Lanka’s president said, referring to deals with its bilateral and commercial creditors that the country now needs to negotiate. “But what I like, and what can happen, are two different timelines.”
“There’ll be a lot of shadow boxing but, other than that, at the end of the day, neither side can afford to take a very rigid stance,” Wickremesinghe said. “There has to be compromise.”
Sri Lanka’s struggles with goods shortages, rising hunger and political unrest made it a symbol of global economic turmoil last year. Its negotiations with its creditors have become a barometer of how lenders respond to rising global debt distress, with Beijing’s role drawing particular international scrutiny.
The IMF is set to disburse an initial tranche of about $330mn, with the arrival of the rest of the funds contingent on Sri Lanka making progress towards a preliminary deal to restructure its debt.
However, elements of reaching that deal are out of Colombo’s control, with Sri Lanka relying on an easing of tensions between China, the country’s main bilateral lender, and other creditors for progress to occur.
The president acknowledged “geopolitics” could affect his government’s ambitions.
The IMF deal, which was first proposed in September, was only able to gain approval after Beijing dropped its resistance to a planned restructuring this month.
Other troubled debtors that owe large amounts to China, such as Ghana and Pakistan, are closely watching Sri Lanka’s negotiations.
Colombo owes about $40bn in foreign debt to bilateral creditors — including China, India and Japan — as well as commercial bondholders, along with about another $40bn in domestic debt, according to IMF figures.
“The whole issue is whether [our bilateral creditors] will be on one platform or whether we’ll talk with China and with the Paris Club members separately,” Wickremesinghe said, referring to a group of bilateral lenders that includes Japan and western European nations.
He said he expected the Chinese “will come along” with a debt deal, notwithstanding tensions between Beijing and others over the size of the potential writedown China might be asked to swallow.
Beijing, whose importance as a lender to developing economies has surged over the past decade, has forged its own path with cash-strapped creditor nations during the emerging debt crisis.
It has so far proved reluctant to treat debts along the lines put forward by western lenders, arguing that global norms concerning restructuring need to be updated. Critics, including the US, say this has slowed down the ability of countries such as Zambia to recover from debt crises.
Sri Lanka last year became the first Asia-Pacific nation to default on its debt in two decades.
Shortages of foreign currency on the island of 22mn led Sri Lanka to become a symbol of the havoc caused by high global inflation and economic mismanagement. Mass protests forced Wickremesinghe’s predecessor, Gotabaya Rajapaksa, to flee the island.
Many also held Wickremesinghe, who was prime minister at the time, among those responsible for the country’s crisis. His house was set ablaze during the unrest. “I lost my whole collection of books and antiques,” he said.
Since he ascended to the more powerful post of president in July, Wickremesinghe’s government has raised taxes as part of its commitments to the IMF.
Analysts said seeing out the IMF programme could prove challenging, with reforms including privatising its state-owned telecoms company, airline, hotels and other assets considered politically contentious.
“I would like to see the government get out of business except for the financial sectors,” Wickremesinghe said.
Without his government’s 25-year reform programme, Sri Lanka’s economy would “have no future”.
